MENA MARKETS REVIEW: OCTOBER 2018

Kuwait: November 11, 2018

HIGHLIGHTS

• A jump in the yield on US 10-Year Treasuries, coupled with strong economic data, spooked financial markets which started a month-long decline. US Markets tumbled erasing the majority of their year-to-date gains. The decline quickly spread to global markets.
• Equities tumbled across Europe, while the already troubled Emerging markets descended deeper into negative territory.
• Oil had its worst performance in more than 2 years as supply worries dissipated and were replaced by concerns of a weakening demand.
• GCC Markets fared much better than global peers supported by a strong mid-month recovery in Saudi Equities and a strong Qatari performance.

POLITICAL AND ECONOMIC CONCERNS WEIGH ON EUROPE

Both the economic and political outlooks in the Eurozone deteriorated last month. Data showed that growth momentum has eased and business confidence waned further. In addition, Italy’s fiscal imprudence, the resignation of chancellor Merkel as leader of her party and the now increased prospect of a ‘no deal’ Brexit invited greater speculation over the future of the EU. While aware of these developments, the ECB announced at its latest meeting that it still believes, albeit now less enthusiastically than before, that overall conditions permit it to end its stimulus program by the end of 2018. However, these developments greatly cloud the outlook for the EU, particularly ahead of major political events in 2019, when a new EU parliament and ECB president are due to be elected.

European growth eased more than expected in 3Q18, coming in at 0.2% q/q (1.7% y/y) compared to analyst expectations of 0.3%. This was the region’s slowest quarterly expansion since 2014, and potentially reflects weaker momentum in Germany due to a softer global trade environment, and no growth in Italy. October’s PMI data also suggests that momentum may weaken further in 4Q18, with the composite index dropping to a two-and-a-half year low of 52.7 over the month. Meanwhile, inflation hit its highest in six years at 2.2% on the back of rising energy prices. Core inflation, although up to 1.1%, increased less than expected.

BOJ KEEPS POLICY ON HOLD AMID SOFT DEMAND

Japan’s trade sector continues to struggle, not least because of the ongoing trade war between China and the US. In September, Japanese exports fell for the first time since 2016 on the back of a fall in demand from both China and the US as well as supply constraints following a series of natural disasters. The continued weakness in domestic demand also weighed on imports. Tepid demand and natural disaster-related effects are likely to have caused GDP growth to slow in 3Q18 (data due November 14th). Subsequently, to remain supportive of the economy, the Bank of Japan kept its monetary policy steady in October as widely expected. Monetary policy is likely to stay loose for the time being, especially after the central bank revised down its 2018 and 2019 inflation forecasts to 0.9% and 1.4%, respectively.

Read the rest of the report here.